Within the next few months, the UK Government is expected to introduce a new self-standing investment screening regime, representing a fundamental overhaul and major expansion of its existing powers to intervene in transactions on national security grounds.
These upcoming changes reflect a broader global trend of sharpened scrutiny towards inbound foreign investment, particularly in light of the COVID-19 situation and political mistrust of foreign State actors.
There is currently no standalone investment notification regime in the UK. However, under the UK’s existing merger control laws contained in the Enterprise Act 2002, the UK Government has the power to intervene, require commitments and ultimately take prohibitive action regarding transactions raising “public interest” considerations that meet the merger control thresholds. In so-called “special public interest” cases, intervention is also possible in certain cases not meeting the merger control thresholds, for example in cases involving UK Government contractors with access to confidential information about defence. The most relevant public interest consideration in a foreign investment context is “national security”. Since 2002, the UK Government has reviewed a number of high profile cases on this basis, principally in the defence sector.
In June 2018, the thresholds for intervention were lowered for target companies active in developing “dual use” and military products, computing hardware and quantum technology. Since June 2020, these lower thresholds also apply to transactions where the target has certain advanced technology activities within artificial intelligence, cryptographic authentication or advanced materials. Also in June this year, a new public health public interest criterion was introduced in response to a perceived need to safeguard critical supply chains post-COVID-19. For more information on the impact of COVID-19 on global foreign investment review, please see our separate blog post accessible here.
Proposals for reform
In July 2018, the UK Government published a National Security and Investment White Paper which outlined plans for establishing a voluntary foreign investment review system. The regime would capture a broad range of transactions (the relevant “trigger events” being simply the acquisition of at least 25% of shares or votes, or of significant influence or control) and give the UK Government a broad discretion to intervene on national security grounds. For example, the White Paper did not envisage any (turnover, asset or market share) jurisdictional thresholds for intervention, and the rules would in principle apply to any sector of the UK economy (albeit with certain sensitive “core areas” such as national infrastructure and advanced technology more likely to raise issues).
Although the UK Government has not yet formally responded to the White Paper consultation, which ended in 2018, earlier this year, the UK Government indicated that it is fast-tracking the introduction of a National Security and Investment Bill leading to a new standalone regime, which could be established before the end of the year. It is not yet fully clear whether the new Bill will reflect the 2018 White Paper, or whether it will be even stricter than what was envisaged by these earlier proposals. However it is likely that a broad range of sectors and transactions will potentially be caught by the regime’s rules (akin to a US CFIUS-style regime). Although we expect the nationality of acquirers not to be a formal criterion under the new Bill (and, indeed, a number of cases involving US acquirers have raised scrutiny), in practice, investors from sensitive jurisdictions, such as China, Russia or the Middle East, will be likely to face particular hurdles.
Our dedicated foreign investment review specialists are monitoring these developments closely and will be keeping you updated about these issues both before and after the publication of the Bill. Coming amidst ongoing economic and geopolitical disruption, and with digitalisation and artificial intelligence forming an ever-increasing part of many industries, the potential impact of the reforms will be far-reaching for a wide range of businesses.